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The changing face of adviser outsourcing

We’re seeing advisers increasingly looking to outsource different bits of the supply chain as they become busier with new clients and find they are facing capacity constraints within their business.

Pension freedoms have created an environment where clients need advice for longer. While this is a hugely positive business opportunity for advisers, they are getting exceptionally busy and are having to think about their business processes differently. This might mean using technology better, but it also might mean outsourcing in order to get the capacity that’s needed to spend more time servicing clients.

On the investment side, advisers are beginning to think long and hard about how they add value to their clients. In the old days, the focus was on investment and product selection. Today, advisers add value through understanding clients’ lifestyle aspirations and personal requirements. It’s more about financial planning and coaching than products.

To enable advisers to focus on these elements, they are looking to outsource different parts of their proposition. Investment is an obvious one to outsource because of its complexity, and many advisers feel an experienced investment professional is better placed than they are to help clients on investment selection.

One positive aspect of outsourcing is it frees up advisers’ time to focus on the parts of the process clients value the most: financial planning and client engagement. Another positive is infrastructure: discretionary fund managers (DFMs) can afford to invest in the right talent and experience, plus the systems and controls behind that, which can help advisers to run a more industrialised investment proposition.

One of the potential downsides relates to the requirement for advisers to carry out a significant amount of due diligence on their outsourcing partner. Firms need to go beyond this to think about mitigating risks and how do they hold their DFM to account. Also, what are the trigger points to review that relationship and either bring investment selection in-house or work with someone else?

Advisers also need to consider the impact of fees. In a low return environment, the overall cost to clients of advice, the platform and the investment solution may begin to look top-heavy, so advisers need to manage this. We’ve seen some advisers who’ve liked the theory of outsourcing to a DFM, but after crunching the numbers they’ve realised DFMs aren’t necessarily generating higher returns than the advice firm itself was generating. So in that scenario, what is the client paying for?

Overall, outsourcing decisions will always come back to due diligence. The regulator could become increasingly concerned that advisers are outsourcing to DFMs in a way that doesn’t recognise the underlying needs of individual clients. If an adviser feels some clients shouldn’t be exposed to investments such as derivatives, or funds that use aggressive short-selling strategies, what are they doing to guard against that and ensure the DFM doesn’t include these kinds of assets in their models? DFMs can no longer operate a ‘one size fits all’ service.

The onus is also on advisers to have a process for clients that aren’t suitable for DFMs, and to put appropriate alternative investment solutions in place.